Wealth Accumulation
The past twenty years have seen a tremendous boom in the mutual fund industry. Major market indices, the S&P 500 and Aggregate Bond Index, have posted impressive returns. Yet the average investor has earned only a fraction of these results.
The two principal reasons for the shortfalls are:
Mutual fund performance reports assume a lump sum investment made once and then held for the entire period being reported. In reality this rarely happens.
Current industry practices are to report a mutual fund's returns based on a lump sum investment at the start of the time period being measured (one, three, five, ten years, etc.). While theoretically useful, there are virtually no investors that exhibit this type of behavior, making the published returns applicable to no one. Investors are buying and selling and they rarely have the discipline or the cash to make a single lump sum investment without the need to withdraw from, or desire to add to their investment.
Investors are often motivated by greed and fear - not by sound investment practices. Investors that procrastinate or try to time the market may earn nothing. Close examination of investor behavior reveals that many investors wait for markets to rise and then dump cash into mutual funds. A selling frenzy begins after a decline. Tracking the dollars going into and out of mutual funds over a given month compared to market performance proves this correlation. In addition, the allure of new or popular funds will also cause investors to switch. The announcement of fund closings also causes withdrawals. These behaviors lower investor returns, depending on when they occur.
The two principal reasons for the shortfalls are:
Mutual fund performance reports assume a lump sum investment made once and then held for the entire period being reported. In reality this rarely happens.
Current industry practices are to report a mutual fund's returns based on a lump sum investment at the start of the time period being measured (one, three, five, ten years, etc.). While theoretically useful, there are virtually no investors that exhibit this type of behavior, making the published returns applicable to no one. Investors are buying and selling and they rarely have the discipline or the cash to make a single lump sum investment without the need to withdraw from, or desire to add to their investment.
Investors are often motivated by greed and fear - not by sound investment practices. Investors that procrastinate or try to time the market may earn nothing. Close examination of investor behavior reveals that many investors wait for markets to rise and then dump cash into mutual funds. A selling frenzy begins after a decline. Tracking the dollars going into and out of mutual funds over a given month compared to market performance proves this correlation. In addition, the allure of new or popular funds will also cause investors to switch. The announcement of fund closings also causes withdrawals. These behaviors lower investor returns, depending on when they occur.
